ITC TO BE REVERSED

To calculate the Input Tax Credit (ITC) reversal for exempt supplies under GST, you must follow the provisions of Rule 42 (for inputs and input services) and Rule 43 (for capital goods) of the CGST Rules.

1. Calculation Formula (Rule 42)

For common inputs and input services used for both taxable and exempt supplies, the reversal is calculated using the following steps:

• Step 1: Identify Common Credit ($C2$)

  • Start with the total ITC on inputs and input services ($T$).

  • Subtract:

    • $T1$: ITC used exclusively for non-business purposes.

    • $T2$: ITC used exclusively for exempt supplies.

    • $T3$: ITC that is "blocked" under Section 17(5).

    • $T4$: ITC used exclusively for taxable/zero-rated supplies.

  • Common Credit ($C2$) = $T - (T1 + T2 + T3 + T4)$

• Step 2: Determine Reversal Amount

  • Attributable to Exempt Supplies ($D1$): $(E / F) \times C2$

    • $E$ = Aggregate value of exempt supplies.

    • $F$ = Total turnover in the state during the tax period.

  • Deemed for Non-Business Purposes ($D2$): $5\%$ of $C2$.

  • Total ITC to be Reversed = $D1 + D2$

2. Reporting in GSTR-3B

The reversal must be reported in Table 4 of your GSTR-3B return:

• Table 4(B)(1) - "As per rules 42 & 43 of CGST Rules": Report the calculated reversal amount ($D1 + D2$) here.

• Permanent vs. Temporary Reversal:

  • Reversals under Rules 42 and 43 are generally permanent and cannot be reclaimed later, unlike temporary reversals (e.g., non-payment to suppliers within 180 days) which may be reclaimed in Table 4(A)(5) and 4(D)(1) once conditions are met.

• Electronic Credit Reversal and Re-claimed Statement (ECRS): The GST portal maintains an ECRS ledger to track your reversals and reclaims. Ensure your manual calculations reconcile with the figures reported in your returns to avoid future discrepancies.

Summary: Use Rule 42 to calculate your proportional reversal ($D1+D2$) based on the ratio of exempt supplies to total turnover and report this in Table 4(B)(1) of your GSTR-3B.

ITC Reversal and Re-Claim explained

This video is relevant as it provides a practical walkthrough on how to identify and report various types of ITC reversals, including those under Rules 42 and 43, within the GSTR-3B return.